2013-05 restructurings
TRANSCRIPT
Restructurings
Prepared by: Public Sector Accounting Board
February 2013
Comments are requested by May 17, 2013
PS
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Commenting on this Statement of Principles
This Statement of Principles reflects proposals made by the Public Sector Accounting
Board (PSAB). It presents key principles that the Board expects to include in a future
exposure draft.
Individuals, governments and organizations are invited to send written comments on this
Statement of Principles.
Comments are most helpful if they are related to a specific principle, paragraph or group
of paragraphs. Any comments that express disagreement with the proposals in the
Statement of Principles should clearly explain the problem and include a suggested
alternative, supported by specific reasoning. All comments received will be available on
the website shortly after the comment deadline, unless confidentiality is requested. The
request for confidentiality must be stated explicitly within the response.
For your convenience, a PDF response form has been posted with this document. You
can save the form both during and after completion for future reference. You are not
restricted by the size of the interactive comment fields in the response form and there is
also a general comments section.
Alternatively, you may send written comments by e-mail in Word format to: [email protected]
To be considered, comments must be received by May 17, 2013, addressed to:
Tim Beauchamp, Director
Public Sector Accounting
The Canadian Institute of Chartered Accountants
277 Wellington Street West
Toronto, Ontario M5V 3H2
RESTRUCTURINGS | i
Highlights
The Public Sector Accounting Board (PSAB) proposes, subject to comments received on
this Statement of Principles and following its due process, to expose a proposed new
Section on restructurings. The Section would apply to public sector entities that base
their accounting policies on the CICA Public Sector Accounting (PSA) Handbook.
Main features
The main features of this Statement of Principles are as follows:
A restructuring transaction is defined separately from an acquisition.
A restructuring transaction is a transfer of an integrated set of assets and liabilities,
together with related program or operating responsibilities, that does not involve an
exchange of significant consideration, which is determined primarily based on the
fair value of the individual assets acquired and liabilities assumed.
Individual assets and liabilities items transferred in a restructuring transaction are
recognized by the restructured entity at their carrying amounts.
The carrying amounts of assets and liabilities transferred in a restructuring
transaction are adjusted, where necessary.
The difference between the total assets and total liabilities transferred in a
restructuring transaction are recognized in:
— opening accumulated surplus or deficit if the restructured entity is a new entity;
or
— revenue or an expense if the restructured entity existed prior to restructuring.
Restructuring-related costs are recognized as expenses when incurred.
Individual assets and liabilities transferred in a restructuring transaction are initially
classified in the statement of financial position of the restructured entity based on its
accounting policy and circumstances at the restructuring date.
Financial position and results of operations of the restructured entity prior to
restructuring date are not restated.
Disclosure of information about the restructuring entities or transferred operations
prior to restructuring date is encouraged but not required.
Comments requested
PSAB welcomes comments from individuals, governments and organizations on all
aspects of the Statement of Principles.
ii | STATEMENT OF PRINCIPLES – FEBRUARY 2013
When comments have been prepared as a result of a consultative process within an
organization, it is helpful to identify generically the source of the comment in the
response. This will promote understanding of how the proposals are affecting various
aspects of an organization.
Comments are most helpful if they relate to a specific principle, paragraph or group of
paragraphs. Any comments that express disagreement with the proposals in the
Statement of Principles should clearly explain the problem and include a suggested
alternative, supported by specific reasoning, for alternative wording.
Supporting reasons for your comments are most valuable when they demonstrate how
the Statement of Principles proposals, or your alternatives:
produce more relevant information for accountability and decision-making by
external users;
improve the representation of the substance of the underlying transaction or event;
contribute to improved measures and understanding of financial position and
annual results;
facilitate enhanced comparability; and
provide sufficient information for external users to understand the financial
statements.
Please respond to the following question(s):
1. Do you think that there is a need to address accounting and reporting issues of a
restructuring entity? If so, please identify issues that should be addressed and the
reasons for guidance on those issues.
2. Is the definition of a restructuring transaction practical and workable? If so, can you
provide examples of past transactions with application of this definition?
3. Do you agree that the carrying amount is the appropriate initial measure of assets and
liabilities transferred in a restructuring?
4. Do you agree that whether a restructured entity is newly formed or an existing entity
should determine how the restructuring transaction is recognized, and other
presentation and disclosure requirements, as summarized in Table 5?
5. Do you agree that information about the restructuring entities and transferred
operations prior to restructuring date should be encouraged but not required?
6. Can you provide examples of issues arising from or related to restructuring that have
and have not been addressed in this Statement of Principles (for example,
compensation, related arrangements and transactions)? Please comment on the need
for guidance on issues not addressed.
RESTRUCTURINGS | iii
7. Can you identify the effects of applying principles proposed in this Statement of
Principles on how transactions would be accounted for differently and on public
sector financial reporting?
8. Would you be interested in participating in a task force or advisory group should
PSAB decide to form one?
1 | STATEMENT OF PRINCIPLES – FEBRUARY 2013
RESTRUCTURINGS
TABLE OF CONTENTS
PARAGRAPH
Background ................................................................................................... .01-.22
Need for a public sector standard on restructurings ................................ .05-.08
Intended outcomes and expected effects ................................................. .09-.10
Methods of accounting for entity combinations ...................................... .11-.14
Approach of other standard setters .......................................................... .15-.16
Approach in this Statement of Principles ................................................ .17-.22
Purpose and Scope ..................................................................................... .23-.41
Restructuring transactions ....................................................................... .30-.41
Exchange of consideration .............................................................. .30-.33
Transfer of an integrated set of assets and liabilities with related
responsibilities ................................................................................ .34-.41
Definitions ...................................................................................................... .42-.50
Accounting Policy ....................................................................................... .51-.54
Recognition .55-.77
Individual assets and liabilities transferred .............................................. .57-.62
Difference between assets and liabilities transferred ............................... .63-.65
Assets and liabilities with restrictions ..................................................... .66-.67
Restructuring-related costs ...................................................................... .68-.70
Compensation .......................................................................................... .71-.75
Other restructuring-related transactions and arrangements ..................... .76-.77
Measurement................................................................................................. .78-.81
Classification ................................................................................................ .82-.85
Presentation .................................................................................................. .86-.88
Disclosure ...................................................................................................... .89-.96
Minimum disclosure ................................................................................ .91
Optional disclosure .................................................................................. .92-.96
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BACKGROUND
.01 There is a wide range of restructuring activities in the Canadian public sector.
They include, but are not limited to, amalgamation of entities or operations,
annexation or boundary alteration between neighboring local governments,
transfers of operations or programs from one entity to another and shared
services arrangement entered into by local governments in a region.
.02 Certain types of restructuring activities are more common in some jurisdictions
than in others. Different jurisdictions may use different terms to refer to similar
restructuring activities. Restructurings can be initiated by the entities involved or
imposed by a higher level of government through legislation. One-time lump
sum or ongoing compensation may be provided in restructurings. Some
compensation may be provided over an extended period subsequent to a
restructuring. A restructuring may also give rise to other transactions, new
arrangements or changes to existing ones.
.03 Restructurings in the public sector may be initiated for financial and non-
financial reasons. Cost reduction, elimination of duplication, economies of scale
are common motivations for restructuring. However, restructurings may also be
driven by the need for sufficient land to support future economic development,
long-term infrastructure planning and other non-financial reasons.
.04 Not all restructuring activities involve transfer of assets and liabilities. When
there is no transfer of assets and liabilities, there would be no restructuring
transaction to be accounted for.
Need for a public sector standard on restructurings
.05 Acquisitions of private sector entities or acquisitions that are of a purchase
nature have already been addressed in ADDITIONAL AREAS OF
CONSOLIDATION, Section PS 2510, and INVESTMENT IN GOVERNMENT
BUSINESS ENTERPRISES, Section PS 3070, depending on whether the acquiree
meets the definition of a government business enterprise.
.06 Accounting for restructuring transactions is not specifically addressed in the
CICA Public Sector Accounting (PSA) Handbook. Following the guidance in
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, Section PS 1150, may
lead some to apply the purchase method prescribed in Section PS 2510 and
Section PS 3070 to account for assets and liabilities transferred in restructuring
transactions. The purchase method, which is appropriate for transactions that are
of a purchase nature, would not result in faithful representation of restructuring
transactions that are of a non-purchase nature.
.07 Other national and international public sector standard setters have also
recognized the need for a standard to address public sector entity combinations
3 | STATEMENT OF PRINCIPLES – FEBRUARY 2013
and transfers of operations. Their pronounced and proposed guidance has been
considered in the development of this Statement of Principles.
.08 Public sector restructuring or reform is being contemplated by many Canadian
governments to address fiscal challenges left behind from the recession and
fiscal pressure from an aging population and deteriorating infrastructure.
Accounting guidance that addresses a wide range of restructuring transactions is
needed to ensure consistent treatment.
Intended outcomes and expected effects
.09 The intended outcome of a new Section on restructurings is to provide
accounting and financial reporting guidance that reflects the nature and
economic substance of a wide range of restructuring transactions in the Canadian
public sector.
.10 The expected result is:
(a) a faithful representation and consistent treatment of restructuring
transactions by restructured entities;
(b) adequate user understanding of the nature and effects of a restructuring on
the financial position and operations of restructured entities;
(c) better information for user assessment of pre- and post-restructuring
performance;
(d) better information for user evaluation of whether certain objectives of a
restructuring have been achieved;
(e) enhanced comparability of financial statements of restructured entities; and
(f) comparability of restructured entities with other public sector entities that
have not gone through restructurings.
Methods of accounting for entity combinations
.11 There are three methods of accounting for entity combinations in accounting
literature — the purchase method, the pooling method and the fresh start
method. Each method is appropriate for certain types of entity combinations.
.12 The purchase method requires identification of an acquirer among the combining
entities. The acquirer’s own assets and liabilities are reported at their carrying
amounts while the assets and liabilities acquired from another combining entity
are recognized at their fair values at the date of combination. Results of
operations of the acquiree are reported by the acquirer from the date of the
combination. This method essentially accounts for the entity combination as a
purchase and is usually used to account for acquisitions.
.13 The pooling method is sometimes called merger accounting, carry-over method,
continuity-of-interest method or uniting-of-interest method. Assets and liabilities
of the combining entities are recognized by the merged entity at their carrying
RESTRUCTURINGS | 4
amounts at the date of combination. Results of operations of the combining
entities are combined as if the merged entity had always existed as a single
entity. This method is usually used to account for mergers of equals in the
private sector and for restructuring transactions in the public sector.
.14 The fresh start method assumes that none of the combining entities survives the
entity combination and the history of the new combined entity begins at the date
of combination. Assets and liabilities of the combining entities are recognized by
the new entity that takes control over them at their fair values at the date of
combination. This method is usually used after corporations emerge from
bankruptcy.
Approach of other standard setters
.15 Accounting for entity combinations has evolved over the years in the private
sector. In the past, a common approach is to define mergers and establish criteria
to distinguish mergers from acquisitions. Mergers were accounted for following
the pooling method and acquisitions were accounted for following the purchase
method. Standard setters in the private sector have abandoned this approach in
recent years primarily because it is difficult to draw an unambiguous and non-
arbitrary line between mergers and acquisitions. They also concluded that true
mergers of equals rarely occur. The purchase method is now the only method
allowed when accounting for business combinations in the private sector.
.16 Standard setters in the public and not-for-profit sectors question whether the
purchase method would be appropriate for all types of entity combinations in
their sectors. Many adapted the old private sector merger versus acquisition
approach in their standards or projects to accommodate the non-acquisition type
of combinations.
Approach in this Statement of Principles
.17 The merger versus acquisition approach would not be sufficient to address the
wide range of restructuring activities in the Canadian public sector. Mergers of
equals or amalgamations represent only one of many types of restructuring
transactions in Canada. Many restructuring transactions do not meet the
traditional merger definition or criteria, or share the characteristics of
acquisitions. For example, applying the merger versus acquisition approach to
amalgamations of entities of different sizes may result in the largest
amalgamating entity being the “in-substance” acquirer and the amalgamation
being accounted for as an acquisition.
.18 Restructuring activities can be complex and may involve multiple entities
entering into more than one type of restructuring transaction. For example, a
restructuring may involve part of Town A being annexed to neighboring County
B, with the rest of Town A amalgamated with neighboring Town C. For this
reason, the term “restructurings” is chosen as the title of this Statement of
5 | STATEMENT OF PRINCIPLES – FEBRUARY 2013
Principles instead of the traditional terms “mergers and acquisitions” or
“combinations” used by some private and public sector standard setters to cover
the different types of restructurings in the Canadian public sector.
.19 Therefore, this Statement of Principles does not focus on the three methods of
accounting for entity combinations but on developing principles that reflect the
substance and nature of restructuring transactions in the Canadian public sector.
This involves defining restructuring transactions by their common characteristics
and classifying them according to attributes that have implications for
accounting and financial reporting.
.20 Restructurings in the public sector share many common characteristics. Key
characteristics that reflect the economic substance of all restructuring
transactions in the public sector are:
(a) their non-exchange, non-purchase nature;
(b) a transfer of an integrated set of assets and liabilities that are not random or
unrelated; and
(c) a transfer of program or operating responsibilities is related to the assets
and liabilities transferred.
These characteristics are used to define a restructuring transaction and the scope
for application of the proposed principles.
.21 Transactions that meet the definition of a restructuring transaction may differ in
other aspects. For example, the transaction may involve a transfer of an entire
entity or a portion of an entity, a new entity may be formed in the restructuring
and not all entities involved in the restructuring may continue to exist after the
restructuring.
.22 For the purpose of providing accounting guidance for reporting assets received
and liabilities assumed by the restructured entity, the only aspect that matters is
whether a new restructured entity is formed. To a new restructured entity, the
restructuring transaction gives rise to its formation. To a restructured entity that
existed prior to restructuring, the restructuring is simply a transaction. Whether a
new entity is formed or it is a continuation of an existing entity will have
implications on how the restructuring transaction is recognized and presented.
PURPOSE AND SCOPE
.23 The purpose of this Statement of Principles is to explain and seek stakeholder
feedback on the principles that would be used to develop guidance on accounting
and reporting of assets and liabilities transferred in restructuring transactions by
a restructured entity.
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.24 A restructuring transaction is a transfer of an integrated set of assets and
liabilities, together with related program or operating responsibilities, that does
not involve an exchange of significant consideration, which is determined
primarily based on the fair value of the individual assets acquired and liabilities
assumed.
.25 This Statement of Principles does not deal with accounting for:
(a) acquisitions of a group of assets, an operation or an entity;
(b) contributions of assets or assumptions of liabilities;
(c) restructuring transactions among related parties; and
(d) restructuring transactions by the restructuring entity.
.26 Accounting for acquisitions of an operation or an entity has already been
addressed in ADDITIONAL AREAS OF CONSOLIDATION, Section PS 2510, and
INVESTMENT IN GOVERNMENT BUSINESS ENTERPRISES, Section PS 3070.
Accounting for acquisitions of assets and groups of assets are addressed in
Sections in the PSA Handbook that address specific types of assets.
.27 Contributions of assets or assumptions of liabilities are, in substance, gifts and
would be accounted for in accordance with guidance in GOVERNMENT
TRANSFERS, Section PS 3410.
.28 The Public Sector Accounting Board (PSAB) has issued an Exposure Draft
proposing a new Section on related party transactions. Restructuring transactions
among entities under common control or under shared control will be considered
after PSAB approves this new Section.
.29 Accounting for restructuring transactions by a restructuring entity would be a
straightforward application of general principles in the PSA Handbook. Assets
and liabilities transferred would be derecognized at their carrying amounts. The
net impact of the transfer would be recognized as revenue or as an expense
regardless of whether the restructuring entity will continue to exist after
restructuring. Other restructuring-related costs incurred by the restructuring
entity would be recognized as an expense when incurred.
Restructuring transactions
Exchange of consideration
.30 As guidance on accounting for acquisitions already exists, one of the objectives
of this Statement of Principles is to determine which transactions would follow
ADDITIONAL AREAS OF CONSOLIDATION, Section PS 2510, and
INVESTMENT IN GOVERNMENT BUSINESS ENTERPRISES, Section PS 3070,
and which would follow a restructurings standard.
7 | STATEMENT OF PRINCIPLES – FEBRUARY 2013
.31 The description of an acquisition in Section PS 2510,1 indicates that
consideration is provided to the seller for the net assets acquired. The
consideration made in exchange is not necessary equal to the fair value of the
assets and liabilities transferred, otherwise goodwill or bargain purchase would
not exist.
.32 Most restructurings do not involve an exchange of consideration. Even when
some forms of compensation are provided, they usually do not reflect the fair
value of the individual assets and liabilities transferred or the fair value of the
transferred programs or operations (if that can be determined).
.33 The key difference between an acquisition and a restructuring is the absence or
presence of an exchange of consideration that is primarily based on, but not
necessarily equal to, the fair value of the individual assets and liabilities
transferred.
Transfer of an integrated set of assets and liabilities with related responsibilities
.34 Restructuring transactions are, in some ways, similar to acquisitions as they
involve a transfer of an integrated set of assets and liabilities with related
operations.
.35 The assets and liabilities transferred in a restructuring are not random or isolated
assets or liabilities. They are an integrated set that is somewhat complete in
supporting the program or operation for which the responsibility is also
transferred in the restructuring.
.36 The entity that receives the assets and liabilities also assumes the responsibility
for the delivery of programs or administration of operations that are associated
with the assets and liabilities transferred in the restructuring transaction. How the
service will be delivered, and by whom, the level of service and the location in
which the service will be provided may change subsequent to a restructuring.
.37 Assumption of responsibility to provide services previously provided by the
entity that transfers the related assets and liabilities distinguishes restructuring
transactions from receipts of contributions, gifts or government transfers. For
example, an entity that received a building from another entity without providing
consideration received a gift or a government transfer. On the other hand, an
entity that received a building and the responsibility for delivering community
programs located in that building did not receive a gift or a government transfer.
1 Paragraph PS 2510.11 states, in part: “An acquisition means that the government had acquired control of
a governmental unit and the government, as the buyer, pays cash or other consideration to the seller either
for shares representing voting control or for net assets.”
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.38 The scope of this Statement of Principle can be summarized in the table below:
Table 1: SCOPE OF A RESTRUCTURING TRANSACTION
Presence of
consideration or
compensation?
Significant
exchange Significant
exchange
Substantial but
non-exchange No or nominal
No or
nominal
What is
transferred?
Asset or
group of
assets
Assets +
liabilities +
responsibilities
Assets +
liabilities +
responsibilities
Assets +
liabilities +
responsibilities
Only
assets or
liabilities
What kind of
transaction? Asset
purchase Acquisition Restructuring Restructuring Transfer
.39 A transfer of an integrated set of assets and liabilities together with related
program or operating responsibilities with no or nominal compensation is
obviously a restructuring transaction. Determining whether a transfer with
substantial compensation is an acquisition or a restructuring may not be as
straight forward.
.40 How the amount is determined would help determine whether they are in
substance consideration for an acquisition or compensation provided in a
restructuring transaction. Consideration that is determined primarily based on the
fair value of the individual assets acquired and liabilities assumed generally
reflects the purchase nature of acquisitions.
.41 Terms and conditions of any applicable agreements and relevant factors in the
circumstances would be considered in the exercise of professional judgment. For
example, compensation may include reimbursement of costs or short-term relief
of losses.
Principle 1
A restructuring transaction is a transfer of an integrated set of assets and liabilities
together with related program or operating responsibilities, that does not involve an
exchange of significant consideration, which is determined primarily based on the fair
value of the individual assets acquired and liabilities assumed.
9 | STATEMENT OF PRINCIPLES – FEBRUARY 2013
DEFINITIONS
.42 At least two parties are involved in a restructuring transaction. An entity
involved in a restructuring transaction can be a restructuring and/or a
restructured entity. Their definitions are summarized and compared in the table
below:
Table 2: PARTIES TO A RESTRUCTURING TRANSACTION
Restructuring Entity Restructured Entity
Exists before restructuring Yes May be
Transfers in restructuring Yes Not necessary
Receives in restructuring Not necessary Yes
Formed in restructuring No May be
Exists after restructuring May be Yes
.43 A restructuring entity is an entity that is subject to a restructuring transaction.
It exists before a restructuring transaction. A restructuring entity transfers assets
and liabilities together with related program or operating responsibilities in a
restructuring transaction. In some restructurings, a restructuring entity may also
receive new assets and assume new liabilities and related program or operating
responsibilities.
.44 A restructured entity is an entity resulting from a restructuring transaction. It
exists after a restructuring transaction. It may be a new entity formed as a result
of the restructuring transaction or an existing entity that receives new assets and
assumes new liabilities and related program or operating responsibilities. There
can be more than one restructured entity in a restructuring transaction.
.45 Whether a restructured entity is a new or an existing entity depends on if the
governing board of one of the restructuring entities takes control over the
financial and operating policies of the restructured entity. For example, two
members are added to the eight-member governing board of restructuring entity
A to provide representation from restructuring entity B. Since the governing
board of restructuring entity A has the power to govern restructured entity AB,
the restructured entity AB is an existing restructured entity (i.e., a continuation
of restructuring entity A.)
.46 A restructuring may involve a transfer of assets, liabilities and responsibilities
from different restructuring entities at different dates. Application of this
Statement of Principles would be based on whether the ultimate restructured
entity is a new or an existing entity. The restructuring agreement entered into by
them or the restructuring plan of the imposing government would indicate
whether the governing board of one of the restructuring entities will take control
over the ultimate restructured entity after all the transfers are completed.
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.47 In straightforward restructuring transactions, a restructuring entity that exists
prior to a restructuring would only transfer assets, liabilities and related
responsibilities to a restructured entity. The restructured entity would only
receive the transferred assets, liabilities and related responsibilities.
.48 In the more complex restructuring transactions, a restructuring entity may
become an existing restructured entity if responsibilities and related assets and
liabilities are received from or swapped with another entity. For example, a
provincial government may transfer the responsibility for maintaining local
roads and bridges with related assets and liabilities to municipalities and assume
the responsibility for delivery of certain social programs with related assets and
liabilities from municipalities in a restructuring transaction.
.49 Restructuring date is the date the restructured entity obtains control of the
assets, becomes obligated for the liabilities and assumes responsibilities for the
related program or operation transferred.
.50 The carrying amount of an asset acquired or a liability assumed is the amount
reported in the statement of financial position of the restructuring entities at the
restructuring date.
ACCOUNTING POLICY
.51 The definition of the carrying amount assumes that a restructuring entity
prepared its financial statements in accordance with PSA standards prior to
restructuring. If this is not the case, the carrying amounts of the transferred
assets and liabilities would be adjusted to comply with PSA standards before
they can be recognized by the restructured entity at the restructuring date.
.52 Restructuring entities may have adopted different accounting policies and
methods from those to be adopted by the restructured entity. The economic
assumptions used by the restructuring entities, such as the expected inflation
escalation and discount rate in determining the long-term liabilities transferred in
a restructurings, may not be consistent with those to be used by the restructured
entity.
.53 Consistent accounting policies, methods and assumptions would apply to a
restructured entity’s existing assets and liabilities, if any, and those received in a
restructuring. Adjustments to the carrying amounts of assets and liabilities
received to achieve consistency would be made prior to their initial recognition
by the restructured entity to establish consistent bases for reporting subsequent
to the restructuring date. These changes are made at the restructuring date
because they arise from the restructuring transaction, not from results of
operation of the restructured entity subsequent to restructuring date.
11 | STATEMENT OF PRINCIPLES – FEBRUARY 2013
.54 Conforming to accounting policies of the restructured entity may also require
reclassification of assets and liabilities transferred in a restructuring transaction
at the restructuring date. For example, reclassification would be required if the
restructuring and the restructured entities have different accounting policies on
designating financial assets and financial liabilities in the fair value category
under FINANCIAL INSTRUMENTS, paragraph PS 3450.023, and the
restructuring does not give rise to changes in how risks would be managed and
performance would be evaluated.
Principle 2
The carrying amounts of assets and liabilities transferred in a restructuring transaction
should be adjusted, where necessary:
(a) to comply with Public Sector Accounting Standards;
(b) to align with the accounting policies, methods and assumptions of the restructured
entity; and
(c) to reflect changes in circumstances arising from restructuring,
prior to their initial recognition by the restructured entity at the restructuring date.
RECOGNITION
.55 A restructured entity may encounter up to three types of recognition issues in a
restructuring — those related to the assets received and liabilities assumed, those
related to restructuring-related costs and those related to other transactions or
arrangements arising from restructuring. They are summarized in the table
below:
Table 3: RECOGNITION ISSUES
Assets and Liabilities Transferred Restructuring--related Costs
Individual assets and liabilities Before restructuring date —
costs to enable a restructuring transaction
Difference between total assets and total
liabilities transferred
At restructuring date —
compensation
Assets and liabilities with restrictions After restructuring date —
costs to achieve the objectives of restructuring
Other Restructuring Related Transactions
.56 Recognition principles proposed in this Statement of Principles are consistent
with the general recognition principles in the conceptual framework and other
Sections in the PSA Handbook. Classifying restructuring-related costs as the
before, at and after restructuring date categories in the table above are meant to
illustrate when these costs are usually incurred. It is not intended to override the
general recognition principle (i.e., costs recognized when incurred) and the
recognition criteria in applicable standards if and when these costs are not
incurred as shown in the table above.
RESTRUCTURINGS | 12
Individual assets and liabilities transferred
.57 Under the traditional merger accounting method, a restructured entity is only
allowed to recognize assets and liabilities that were previously recognized by the
restructuring entities. No additional assets or liabilities can be recognized by the
restructured entity. In effect, this approach carries over the perspective of the
restructuring entity to the restructured entity and is considered consistent with
the initial measure of assets and liabilities transferred at their carrying amounts.
.58 Another reason for this approach is to prevent a restructured entity from
recognizing intangible assets that were developed internally and are not
permitted to be recognized by the restructuring entity. Recognition of internally
developed intangible assets is prohibited by many standard setters. This is not an
issue because the PSA Handbook does not allow recognition of intangibles
regardless of whether they are purchased or developed internally.
.59 The view taken in this Statement of Principles is that meeting the definitions of
assets and liabilities in the conceptual framework and the recognition criteria in
the applicable standards are fundamental to the recognition of an asset and a
liability. This approach focuses on the perspective and circumstances of the
restructured entity at the restructuring date. One of the results of this approach is
that inter-entity balances arising prior to restructuring between operations or
entities that are combined in the restructuring will be effectively eliminated.
.60 When applying the applicable recognition criteria to individual assets and liabilities
transferred, an adjustment to their carrying amounts at the restructuring date may be
required as the restructuring may result in changes in circumstances affecting the
transferred assets and liabilities. For example, the manner and duration of use of a
tangible capital asset transferred may change as a result of restructuring. Its carrying
amount at the restructuring date may need to be adjusted to recognize any
impairment loss that may have resulted from the restructuring. Environmental
standards applicable to a solid waste landfill site or a contaminated site transferred
in a restructuring may be different in the restructured entity. Adjustment to the
carrying amounts of these liabilities may be required at the restructuring date.
.61 Adjustments to the carrying amounts of assets and liabilities initially recognized
by the restructured entities would only be made to reflect changes that are
effective upon restructuring and new conditions existing at the restructuring
date. Plans for future change or anticipated future conditions would not be
recognized earlier than they would have been otherwise by applying the
applicable Sections in the PSA Handbook.
Principle 3
Individual assets and liabilities transferred in a restructuring transaction should be
recognized by the restructured entity if they meet the definitions of assets and liabilities
and applicable recognition criteria at the restructuring date.
13 | STATEMENT OF PRINCIPLES – FEBRUARY 2013
.62 The initial amount to be recognized for the individual assets received and
liabilities assumed by the restructured entity would be the sum of the following,
where applicable:
Table 4: INITIAL RECOGNIZED AMOUNT FOR INDIVIDUAL ASSETS AND
LIABILITIES
=
Carrying amount as reported by the restructuring entity (paragraph .50)
+
Adjustments to comply with PSA standards (paragraph .51)
+
Adjustments to comply with restructured entity’s accounting policies, methods and assumptions
(paragraphs .52 and .53)
+
Adjustments to reflect changes in circumstances arising from restructuring (paragraphs .60 and .61)
Difference between assets and liabilities transferred
.63 Recognition of the effects of restructuring (i.e., the difference between the total
assets and total liabilities initially recognized by the restructured entity at the
restructuring date), would reflect the nature of the restructuring transaction from
the perspective of the restructured entity.
.64 If a new restructured entity is formed as a result of a restructuring, its history
begins on the restructuring date, when it receives the assets and assumes the
liabilities and related responsibilities transferred. Because it is a new entity, the
difference between the total assets and total liabilities initially recognized by the
restructured entity at the restructuring date would be recognized as the opening
accumulated surplus or deficit balance of the restructured entity.
.65 If a restructured entity exists before the restructuring, the restructuring is a
transaction of that entity. The difference between the total assets and total
liabilities initially recognized by the restructured entity at the restructuring date
would be recognized as revenue or as an expense in its statement of operations in
the reporting period the restructuring occurs.
Principle 4
The difference between the total assets and total liabilities transferred in a restructuring
transaction should be recognized in the opening accumulated surplus or deficit balance
of a newly-formed restructured entity, or as revenue or as an expense of a restructured
entity that existed prior to restructuring.
Assets and liabilities with restrictions
Some restructuring transactions may involve a transfer of assets that will
continue to benefit residents of the restructuring entity and/or a transfer of
liabilities that will continue to be the obligations of residents of the restructuring
RESTRUCTURINGS | 14
entity that makes the transfer. Depending on the terms and conditions of the
applicable agreement, the nature of the restrictions in the particular
circumstance, the assets transferred may be externally or internally restricted
assets, or designated assets.
.66 Such assets and liabilities would be recognized in accordance with applicable
guidance in RESTRICTED ASSETS AND REVENUES, Section PS 3100, FUNDS
AND RESERVES, PSG-4, and other relevant Sections in the PSA Handbook.
Restructuring-related costs
.67 Costs incurred to enable a restructuring transaction may include, but are not
limited to, legal, accounting, valuation, consulting and professional services.
These costs are usually incurred prior to the restructuring date.
.68 Costs incurred to achieve the objectives of restructuring may include, but are not
limited to, those related to exiting an activity, terminating and combining
programs, relocating and terminating employees, and terminating contracts.
These costs are usually incurred by the restructured entity after the restructuring
date.
.69 These restructuring-related costs would be recognized by the entity that incurs
the expense in accordance with the applicable standards. Restructuring is not an
event that can justify a delay or an advance in recognition of these costs as
expenses. For example, termination benefits would be recognized as an expense
in accordance with guidance in POST-EMPLOYMENT BENEFITS,
COMPENSATED ABSENCES AND TERMINATION BENEFITS, paragraph PS
3255.28.
Principle 5
Restructuring-related costs should be recognized as an expense when incurred in
accordance with the applicable Sections in the PSA Handbook.
Compensation
.70 Compensation in various forms may be provided in some restructurings. The
compensated amount may be substantive depending on the nature of the
restructuring, the relative bargaining power of entities involved and the effects of
restructuring on those entities. Compensation may be made at the restructuring
date, provided at a future date or made over an extended period subsequent to
the restructuring date. Certain compensation may depend on the occurrence of
future events or transactions (for example, future revenues). Compensation or
promises are part of the restructuring transaction if it can be established that the
liability exists at the restructuring date.
15 | STATEMENT OF PRINCIPLES – FEBRUARY 2013
.71 Compensation not dependent on the occurrence of future events or transactions
would be recognized at the restructuring date independent of the assets and
liabilities transferred in the restructuring transaction. Promises that do not meet
the definition of a liability at the restructuring date would not be recognized as
they are future transactions.
.72 A restructured entity may promise to pay a restructuring entity to continue to
provide certain services for a fee subsequent to restructuring until the
restructured entity is ready to establish its own operation to deliver the service.
The promise to pay, though it arises from restructuring, is a fee for future service
and not compensation for the restructuring. The restructured entity does not have
a liability until services are provided by the restructuring entity.
.73 A restructuring entity may provide upfront lump sum payment or a promise to
provide annual funding to a restructured entity to compensate for a program
delivery responsibility that is transferred in a restructuring. This funding is not a
cost of restructuring to the restructured entity as it is the recipient of a
government transfer. The funding would be accounted for in accordance with
relevant guidance in GOVERNMENT TRANSFERS, Section PS 3410.
.74 A restructured entity may promise to limit future tax increases for an extended
period subsequent to restructuring so that the lower tax rate levied by the
restructuring entity and the restructured entity would apply to the affected property
owners. This promise, though it arises from restructuring, does not establish a
liability to the restructured entity at the restructuring date. It would be accounted
for in accordance with relevant guidance in TAX REVENUE, Section PS 3510.
Principle 6
Compensation not dependent on the occurrence of future events or transactions should
be recognized as an expense at the restructuring date. Promises that do not meet the
definition of a liability at the restructuring date should not be recognized as they are
future transactions.
Other restructuring-related transactions and arrangements
.75 Restructuring may give rise to other transactions that may not be part of the
restructuring transaction. Transactions that do not meet the definition of a
restructuring transaction would be accounted for in accordance with the applicable
Sections in the PSA Handbook separately from the restructuring transaction.
.76 Restructuring may give rise to a need for or an opportunity to realign pre-
existing arrangements or relationships among the restructuring entities.
Restructuring entities may also enter into other arrangements during their
restructuring discussion. These realignments or new arrangements may not be
part of the restructuring transaction, depending on whether they meet the
definition of a restructuring transaction.
RESTRUCTURINGS | 16
MEASUREMENT
.77 Consideration provided in an acquisition in exchange for the net assets acquired
establishes a new cost basis for the individual assets acquired and liabilities
assumed. As consideration usually reflects the fair value of the net assets
acquired, fair value is an appropriate initial measure of assets and liabilities
acquired in an acquisition.
.78 Restructuring transactions do not have a purchase cost to establish a new cost
basis for the assets and liabilities received by the restructured entity. The
carrying amount is the most logical and appropriate initial measure for assets and
liabilities transferred in restructurings.
.79 As assets and liabilities transferred will likely be used for the same purpose
immediately after the restructuring, the carrying amounts provide a consistent
basis for measuring the cost of programs or operations transferred in the
restructuring, resulting in useful information for accountability assessment and
comparison of pre- and post-restructuring performance. The carrying amounts
also provide a consistent measure for determining whether specific restructuring
objectives, such as cost reduction and more efficient use of resources, have been
achieved.
.80 Not all public sector entities are formed as a result of restructuring. Measuring
assets and liabilities transferred in restructurings at the carrying amounts would
maintain the external comparability of information reported on or produced from
the financial statements of entities that were formed or have gone through
restructurings.
Principle 7
Individual assets and liabilities transferred in a restructuring transaction should be
initially recognized at their carrying amounts with applicable adjustments at the
restructuring date.
CLASSIFICATION
.81 Assets and liabilities transferred in a restructuring would be initially classified at
the restructuring date based on the accounting policy of the restructured entity if
allowed in the applicable Sections in the PSA Handbook and its circumstances at
the restructuring date.
.82 FINANCIAL INSTRUMENTS, Section PS 3450, for example, allows entities to
designate a group of financial assets and/or financial liabilities in the fair value
category upon their initial recognition if an entity manages the risk and evaluates
the performance of the group of financial items on a fair value basis.
17 | STATEMENT OF PRINCIPLES – FEBRUARY 2013
.83 If a transferred financial asset and/or financial liability was previously
designated in the fair value category by the restructuring entity and the
restructured entity does not plan to manage its risk or evaluate its performance
on a fair value basis, reversal of the previous designation at the restructuring date
would be made.
.84 On the other hand, if certain financial assets and/or financial liabilities not
previously managed or evaluated on a fair value basis by the restructuring entity
will be managed and evaluated by the restructured entity on a fair value basis,
these financial items would be designated in the fair value category at the
restructuring date if it is the restructured entity’s accounting policy to designate
such items in the fair value category.
Principle 8
Individual assets and liabilities transferred in a restructuring transaction should be
initially classified in the statement of financial position of the restructured entity based
on its accounting policy and circumstances at the restructuring date.
PRESENTATION
.85 Presentation of the effects of restructuring and the results of operation of the
restructured entity would faithfully represent the nature of the restructuring
transaction from the perspective of the restructured entity. Financial position and
results of operations of the restructured entity prior to the restructuring date
would not be restated.
.86 A restructured entity that is formed as a result of restructuring would present the
restructuring transaction as the transaction that gives rise to the formation of the
entity. Its first statement of financial position would present the initial amounts
recognized for individual assets and liabilities transferred at the restructuring
date, measured at their carrying amounts with applicable adjustments. The
statement of operations for the first reporting period would only include the
results of operation of the transferred responsibilities from the restructuring date
to the end of the reporting period.
.87 A restructured entity that exists before a restructuring would present the effect of
a restructuring transaction as revenue or as an expense. The statement of
operations for the period in which the restructuring occurs would only include
the results of operation of the transferred responsibilities from the restructuring
date to the end of the reporting period, combined with the results of its own
operation for the entire reporting period. Prior periods in the financial statements
would not be restated to include the transferred assets and liabilities or the
transferred operations for reporting periods prior to the restructuring date.
RESTRUCTURINGS | 18
Principle 9
Financial position and results of operations of the restructured entity prior to
restructuring date should not be restated.
DISCLOSURE
.88 Users of financial statements need sufficient information to assess the nature and
financial effects of a restructuring transaction on the restructured entity’s
financial position and operations. Some basic financial and non-financial
information about the restructuring is fundamental to this understanding,
including how the transaction is accounted for, what amounts are recorded and
where they are reported in the financial statements, as well as information not
yet recognized in the financial statements that has implications for future years.
.89 This Statement of Principles proposes that restructured entities that exist prior to
restructuring would provide information about their own financial position as at
and results up to the restructuring date. This information is important for a
complete understanding of the impacts of the restructuring transaction on the
restructured entity.
Minimum disclosure
.90 As a minimum, the following information would be disclosed in the financial
statements of the restructured entity in the reporting period in which the
restructuring occurs:
(a) A brief description of the restructuring transaction, including:
(i) the restructuring entities involved;
(ii) the reasons for the restructuring;
(iii) the restructuring date;
(iv) the nature of assets, liabilities and related responsibilities
transferred;
(v) the nature and terms of any compensation provided; and
(vi) the nature and terms of other promises, concessions, arrangements
or transactions arise from the restructuring.
(b) The recognition and measurement of assets and liabilities transferred,
including:
(i) the carrying amounts of assets and liabilities transferred at the
restructuring date by major classifications;
(ii) the adjustments made to the carrying amounts of assets and
liabilities transferred and the rationale for the adjustments;
(iii) the amount of assets and liabilities initially recognized by the
restructured entity at the restructuring date by major classifications;
and
19 | STATEMENT OF PRINCIPLES – FEBRUARY 2013
(iv) the amount of and the line item in which the difference between the
total assets and total liabilities is recognized at the restructuring
date.
(c) Any contingent liability or contractual obligation transferred that are not
recognized in the financial statements would be separately identified in the
respective notes.
(d) For restructured entities that exist prior to restructuring, additional
disclosure of the following:
(i) the carrying amounts of the restructured entity’s own assets and
liabilities at the restructuring date by major classifications; and
(ii) the results of operations of the restructured entity from the
beginning of the reporting period in which the restructuring occurs
to the restructuring date.
Optional disclosure
.91 Information about the restructuring entities or transferred operations prior to the
restructuring date is useful information for a better understanding of the effects
of the restructuring transaction, trend analysis and pre- and post-restructuring
performance assessment.
.92 Some standard setters require provision of pro-forma historical information of
the restructuring entities as if they were always a merged entity either presented
in the financial statements or disclosed in the notes. This would require restating
prior period numbers with the same adjustments made to the carrying amounts of
assets and liabilities transferred at the restructuring date. Some of this
information may not be available to the restructured entity to make the necessary
restatement.
.93 On the other hand, information of the restructuring entities, as it was previously
reported in their financial statements, would be readily available. In some cases,
this may involve preparation of financial statements for the period in which the
restructuring occurs, and identification of relevant financial information related
to the programs or operations transferred. Though not restated, this information
may be useful for comparing the entity prior to and after restructuring.
.94 This Statement of Principles proposes that disclosure of information about the
restructuring entities or transferred operations prior to the restructuring date
would be encouraged but not required. Information needs of users and the cost
and practicality of providing this information by the restructured entity would be
considered in determining the extent and format of disclosure of such
information.
RESTRUCTURINGS | 20
Principle 10
Sufficient information should be disclosed to enable users to assess the nature and
financial effects of a restructuring transaction on the restructured entity’s financial
position and operations.
Disclosure of information about the restructuring entities or transferred operations prior
to restructuring date is encouraged but not required.
.95 Whether a restructured entity is newly formed or an existing entity not only
determines how the restructuring transaction is recognized, it also determines
where the initial amount of individual assets and liabilities transferred is
presented and/or disclosed, what figures are presented in the statement of
financial position and other additional disclosure requirements. The differences
are summarized in the table below:
Table 5: DIFFERENT ACCOUNTING AND REPORTING OF NEW AND EXISTING
RESTRUCTURED ENTITIES
New Restructured Entity Existing Restructured Entity
Nature of transaction Restructuring gives rise to
formation of restructured entity.
Transaction of restructured
entity.
Effects of restructuring —
Difference between total
assets and total liabilities
recognized
Opening accumulated surplus
or deficit balance.
Revenue or expense.
Presentation and disclosure of
individual assets and
liabilities transferred
Initial recognized amount
presented in statement of
financial position.
Initial recognized amount
disclosed in notes to financial
statements.
Prior period information in
statement of financial position
No prior period information. Prior period information
provided without restatement.
Transferred responsibilities
in statement of operations
Results of operations from
restructuring date.
Results of operations from
restructuring date.
Additional disclosure Information about own assets
and liabilities at and operations
up to restructuring date.